A Great Balancing Act

 | Feb 15, 2012 | 9:01 AM EST  | Comments
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"So be sure when you step. Step with care and great tact and remember that Life's a Great Balancing Act. Just never forget to be dexterous and deft. And never mix up your right foot with your left." --Dr. Seuss

Hope that Greece has finally put together an austerity deal, plus comments out of China that it's ready to assist Europe, have given the market a boost this morning. A late spike Tuesday took the bears by surprise, and now they are squeezed further as the bulls jump in aggressively.

After a couple of weak days, the bears are hoping that this extremely aggressive dip-buying will stop working. It seems logical that the pattern of behavior slows, but market players have a tendency to stick with what works until they are burned several times. Dip-buying has not failed so far this year, and the bulls aren't going to give up until they are clobbered.

What's impressive about the dip-buying action is that it has prevented the market from declining more than 1% for 30 straight days. According to SentimenTrader.com, this is the fourteenth-longest stretch since 1928.

The big question for market players is to what degree you anticipate the pattern coming to an end. Doug Kass, who often focuses on calling tops and bottoms, is already positioning for a reversal. But trend-followers, such as Investor's Business Daily, are sticking with the momentum and aren't ready to back off, although we have had minor setbacks in the upside move.

I'm trying to play the middle ground. I want to respect the trend and keep buying good stocks, but I want to be ready to hit the exit if negative signs develop. I'm finding fewer charts that I want to buy aggressively, which keeps me cautious. I see opportunities in oil and bulk shippers, but the vast majority of charts need to rest and reset. That keeps me cautious by default, although I have no inclination to try to call a top.

The market is always a balancing act, but it becomes increasingly difficult when there is no dip for many weeks. It can't continue forever, but it certainly can last much longer than most people think is reasonable. Fighting it is extremely costly, but many traders are psychologically driven to play the guessing game of calling a top.

There is no easy way to play it. The best we can do is to be aware of the dynamics at work and be ready to move. The market has cracks developing, but the viciousness of the late spike Tuesday makes it dangerous to be overly bearish. The lack of good technical setups forces higher cash holdings, but so many folks have been underinvested for so long that they give us a constant bid.

We are jumping around on Greece news early on, which suggests volatile action today. The dip-buyers remain formidable, but the bears are gaining confidence. Be ready to move.

_______

More from James "Rev Shark" DePorre:

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